Growth in Alternative Investments within Retail Portfolios

Our core growth strategy capitalizes on several long-term industry trends that continue to be valid and strong. One being the steady adoption of Alternative Investments.  Affluent investors and their financial advisors are becoming aware of the portfolio benefits of including alternative investment asset classes such as private real estate, private equity, managed futures, hedge funds, and liquid alternative mutual funds. Also, large asset managers with huge distribution systems, continue to introduce new investment products which has increased retail investor access. ActiveAllocator has invested two years with multiple quant PhDs to develop the data sets and algorithms needed to correctly include such investments in portfolios.

Alternative investments are a fast-growing category. However, they have always been difficult to include in affluent investors’ portfolios. Through interactions with over 300 broker dealer systems and meetings with over 5000 financial advisors, we discovered first hand that alternative investments making just 4%-7% of typical retail client portfolios, remain grossly under allocated. This is in part because financial advisors lack sound means to quantify and demonstrate their accretive portfolio benefits. Given mind boggling heterogeneity across 40 sub-types within real estate, private equity, hedge funds, liquid alternatives, managed futures, oil & gas, credit structures and fixed income substitutes, these investments are poorly understood.

ActiveAllocator is built to account for the special issues that arise when it comes to allocating to complex products and alternative investments, for which Modern Portfolio Theory does not work. These include (i) stale pricing which creates serial correlation in returns which understates true volatility; (ii) reporting bias from instant history, survivorship and selection bias which overstates index returns; (iii) volatility is not a proxy for risk as historical returns exhibit negative skewness and kurtosis as well as downside risk; (iv) illiquidity demands a premium, but is hard to calculate as it varies; (v) managers exhibit style drift which is hard to catch given asymmetric information; and (vi) difficulties in differentiating between expensive active skills versus cheap passive market exposure.

We bring best practices utilized by the most sophisticated institutional investors to the affluent and High Net Worth investor. Financial advisors leverage our cutting-edge algorithms to create thoughtful, supportable exposures to private equity, private real estate, hedge funds and other liquid alternative products, private debt and managed futures. We help facilitate constructive client discussions around specific, quantifiable benefits of alternative asset classes.

We account for, among other things:

  • stale pricing, serial correlation and understated volatility;
  • reporting bias;
  • volatility failing to reflect risk;
  • time variant illiquidity premium;
  • inefficient markets;
  • style drift and asymmetric information; and,
  • skills versus market beta exposure.

Author: Sameer_Jain

Partner. Sameer Jain is founder of FinTech ActiveAllocator.com, the world’s first portal that seamlessly integrates traditional, illiquid and alternative investments within portfolios. Prior to this he was Chief Economist & Managing Director at AR Capital. Before that he headed Investment Content & Strategy at UBS Alternative Investments. At UBS, he served as a non-voting member of the Wealth Management Research investment committee, and as a capital allocator was responsible for all illiquid investing including fund manager selection and due diligence across the platform. Prior to UBS he headed product development & investment research at Citigroup Alternative Investments that managed over $75 billion of alternative investments across hedge funds, managed futures, private equity, credit structures, infrastructure and real estate. Here he led a team that developed proprietary models for portfolio strategy and asset allocation with alternative investments, provided investment support and research to pension plans, sovereign wealth funds, endowments as well as internal clients including Citi Private Bank. Before this he was with Cambridge Alternative Investments and SunGard (System Access) where he travelled to over 80 countries for work across Europe, Asia, Middle-East and Africa. He has written over 30 academic and practitioner articles on alternative investments with thousands of downloads at SSRN, presented at over a hundred industry conferences and has coauthored a book, Active Equity Management. Mr. Jain has multiple degrees in engineering, management, public administration and policy and is a graduate of Massachusetts Institute of Technology and Harvard University. He is a recipient of the Alfred Sloan Fellowship and subsequently was a Fellow of Public Policy and Management at the Harvard Kennedy School of Government for a year. He holds Series 7 and 66 securities licenses.

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